Could AI investment be causing Dutch disease in the US economy?

If this argument is correct, the expansion of artificial intelligence is putting upward pressure on Treasury yields, energy costs and wages for skilled technology workers. This would maintain high financing costs for industries beyond the tech sector. The move aligns with this week's 24-year peak in 10-year Treasury yields, which Bloomberg connected to borrowing by AI-related companies. For stock markets, the theory suggests a growing gap between firms benefiting from AI and consumer-focused companies facing reduced household spending, a trend seen in PepsiCo's North American earnings. Energy markets add another layer, as oil prices driven by the Iran conflict are boosting electricity and input costs separately from AI demand.

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The Netherlands discovered natural gas and saw the rest of its economy shrink; Derek Thompson worries that the US has found AI and is pursuing a similar path.

Summary:

• Writer Derek Thompson (on X @DKThomp) contends that the surge in AI investment could be creating a modern Dutch disease scenario in the US economy
• He claims the build-out is increasing the price of capital, semiconductors, electricity and skilled engineers, outcompeting other industries
• Thompson also argues that inflation is diminishing household incomes and that median wages have been dropping for several months
• Dutch disease refers to the Netherlands' gas boom in the 1960s, which boosted the overall economy but damaged non-gas sectors
• The recent rise in Treasury yields, partly tied to AI borrowing, and PepsiCo's weak US volumes align with parts of the theory
• The comparison has constraints: it functions through competition for inputs rather than currency, and AI might eventually boost productivity

The expansion of artificial intelligence investment could be causing a contemporary form of Dutch disease in the US economy, benefiting one sector while increasing costs for the rest, according to writer Derek Thompson.

In a Substack article, Thompson, a contributing writer for The Atlantic and co-author of the book Abundance, stated his concern that the AI build-out was driving up the cost of capital, chips, electricity and engineers, causing every other sector that depends on these inputs to be outcompeted. Simultaneously, he argued, the average American is experiencing inflation eating away at their income, and he noted that median wages have been declining for several months.

The phrase Dutch disease describes what occurred in the Netherlands following the 1959 discovery of the vast Groningen natural gas field. The windfall increased national income and the currency, but rising prices and a stronger guilder harmed manufacturing and other industries outside the gas sector. The Economist originated the term in the 1970s.

Some evidence supports parts of Thompson's argument. US 10-year Treasury yields hit a 24-year high this week, and Bloomberg pointed to a spike in corporate borrowing to fund AI investment as a factor in the bond selloff, along with heavy government borrowing and elevated energy prices. PepsiCo this week announced falling North American beverage volumes and reduced snack prices, indicating cautious consumer behavior.

The comparison has its limitations, though. Classic Dutch disease operates mainly through a stronger currency that hurts exporters, whereas the AI version, as Thompson frames it, works via competition for scarce inputs. AI could also eventually lift productivity across the broader economy, a benefit that a gas discovery never provided. Other factors are also at play, particularly energy prices driven higher by the Iran conflict, which increase electricity costs and inflation independently of AI demand.

Whether this diagnosis is accurate will depend on future data. Electricity prices, wage figures and the pace of AI-related corporate bond issuance are the metrics most likely to reveal whether the boom is squeezing out the rest of the economy or eventually raising it.